FICO Recalibrates Its

Credit Scores

Changes Could Lead to More Bank

Lending, Easier Credit for Some Consumers

By

ANNAMARIA ANDRIOTIS

Updated Aug. 7, 2014 7:54 p.m. ET

A change in how the most widely used credit score in the U.S. is tallied will likely make it easier for tens of millions of Americans to get loans. AnnaMaria Andriotis joins the News Hub to discuss. Photo: Getty

A change in how the most widely used credit score in the U.S. is tallied will likely make it easier for tens of millions of Americans to get loans.

Fair IsaacCorp.FICO+0.02%said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

The moves follow months of discussions with lenders and the Consumer Financial Protection Bureau aimed at boosting lending without creating more credit risk. Since the recession, many lenders have approved only the best borrowers, usually those with few or no blemishes on their credit report.

The changes are expected to boost consumer lending, especially among borrowers shut out of the market or charged high interest rates because of their low scores. “It expands banks’ ability to make loans for people who might not have qualified and to offer a lower price [for others],” said Nessa Feddis, senior vice president of consumer protection and payments at the American Bankers Association, a trade group.

As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian. And of the 106.5 million consumers with a collection on their report, 9.4 million had no balance—and won’t be penalized under the new credit-score system.

Some critics said that loosening standards could bring losses for borrowers and lenders. “A lot of people really just can’t handle credit—you’re not really helping them by allowing them to dig themselves into debt,” said Howard Strong, a lawyer in Tarzana, Calif., who specializes in consumer-protection class-action lawsuits. “It’s like a sharp knife—if you don’t know how to use it, you can cut yourself.”

Many types of debt, including credit cards, can be discharged in bankruptcy. If borrowers fall behind, they could file for bankruptcy and cause lenders to suffer losses, Mr. Strong said.

A Consumer Financial Protection Bureau spokeswoman declined to comment on the changes by Fair Isaac.

Under the current system, collections can impact credit scores as much as foreclosures and bankruptcies do. But the infractions are often small. Borrowers can be on time paying their debts, for example, but thrown by a medical emergency.

Collections stay on credit reports for as long as seven years, even if a borrower has paid off that balance and remained up-to-date on other debts.

Some experts said the new model for FICO scores walks a fine line: It loosens standards without overstating the creditworthiness of borrowers. Fair Isaac said it ran studies to determine how likely borrowers are to repay their debts if they had a stellar credit record with the exception of such collections.

Consumers often are unaware that their insurance company isn’t paying a medical bill and can end up in default and in collection without knowing it, said Anthony Sprauve, senior consumer credit specialist with Fair Isaac. In contrast, lenders often send repeated notifications to consumers to let them know they have fallen behind.

A revamped FICO score could boost bank lending and lead to savings for people who have debts in collection. Many lenders, including credit-card issuers, use the score as a measure of creditworthiness.Reuters

Most lenders check applicants’ FICO scores to help determine whether to extend credit to consumers and what interest rate to charge. Fair Isaac will begin rolling out the new scoring model, named FICO 9, to credit bureaus this fall and to lenders later this year.

More than half of all debt-collection activity on consumers’ credit reports comes from medical bills, according to the Federal Reserve. Such activity results in lower credit scores for consumers, meaning that lenders are more likely to be cautious in extending credit.

The number of U.S. consumers struggling with medical debt has been surging. As of 2012, 41% of U.S. adults, or 75 million people, had trouble paying medical bills, up from 58 million in 2005, according to a report released last year by the Commonwealth Fund.

The CFPB, in a May report, criticized credit-scoring models used by the financial industry, saying they put too much emphasis on unpaid medical debt and lead to an overly negative view of consumers. CFPB officials say that medical debt is inherently different from other forms of debt because consumers are often unaware of what they owe to hospitals and doctors.

FICO scores have many competitors but are the most widely used. Lenders used them in 90% of consumer and mortgage loan decisions, according to a study this year by the CEB TowerGroup, a financial-services research firm. VantageScore Solutions LLC, a rival credit-scoring firm in Stamford, Conn., rolled out a new scoring model in March 2013 that excludes all paid collections.

Fair Isaac releases new scoring models every few years, and it is up to lenders to choose which ones to use. The new score will likely be adopted by credit-card and auto lenders first, says John Ulzheimer, president of consumer education at CreditSesame.com and a former Fair Isaac manager.

Mortgages are likely to lag, since the FICO scores used by most mortgage lenders are two versions old.

Theimpact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.

The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve.

Even a small move in a borrowers’ credit score can change the outcome of a loan application. Most lenders have a minimum credit-score requirement to lend to an applicant, and lenders can deny someone whose score is even one point below the minimum.

Lenders determine the interest rate a borrower will get based on the borrower’s credit-score bracket.

For example, borrowers with a FICO score between 760 and 850 get an average interest rate of 3.823% on a fixed-rate, 30-year mortgage of $300,000, according to Informa Research Services, a market-research company in Calabasas, Calif.

Borrowers with a 759 FICO score get a 4.045% interest rate on the same loan. Over the life of the loan, the 760 borrower would pay $204,650 in interest charges—or $13,764 less than the 759 borrower.

It is amazing to see the resurgence of housing flipping and rehab centered shows on cable TV. The shows glamorize the lifestyle of flipping forgetting how many people got burned in the previous downturn. Of course, many of the juicy flips already went to other investors and now many in the public are itching to get back into the game. Flipping works on a larger scale when the market is appreciating quickly. Why else would you assume the risk? In slow to declining markets, flippers are relegated to finding beaten down places and having to control costs carefully. You need a team and multiple flips per year to make it lucrative. From watching these shows, costs get out of control very fast and many seem to have a poor grasp of short-term gains and the bite taxes will have on their profits. There also seems to be a “mom flipping” trend. God bless cable television and the creative ways to promote real estate!

House flipping moms

A few months ago, I caught this piece on ABC Nightline regarding “flipping moms” out in the East Coast. The segment was in a lower cost state so for most California viewers, they must have laughed when they saw how far a dollar could go in other real estate markets. The jokes on them however since the sun only shines on the West Coast (#alwaysbeflipping). No $700,000 stucco crap shacks near freeway pollution on these examples. The segment even highlights how careful you need to be to manage your budget to be successful here. However the undertone of “mom flippers” is that “hey, flipping is so easy you can have a career, raise a family, and flip homes on the side!” Of course, the downside is you can have a flip that goes awry and it starts consuming your personal budget. Then again, that makes for boring TV. Take a look at the segment:

“(HGTV) Jen and Barb, two business-savvy moms and longtime best friends, set out to undertake flipping a home in Southern California. From house shopping, to deal making, to decor selecting, and money managing, the two aim to learn every trick of the home flipping trade before this project is done. Pairing their own at-home learnings with a unique perspective through the mom-lens, Jen and Barb hope to, in the end, build the perfect family home AND earn a hefty profit on the resale. Though, as they’ll learn, in the world of the fix and flip, nothing comes without a fight.”

The only reason something like this can occur is that the overall market has a hotness to it. These shows went in the dark after the bust and suddenly were up in Canada yet subtly didn’t mention the location change until viewers realized, “hey, that sure doesn’t sound like SoCal lingo! What kind of money is that?!” I recall watching some of these shows back in 2007 and people started making horrible flips that went down very quickly. Who cares about recent history. Tell me more about how to make money on flips! Ask and you shall receive.

SoCal flip example

When flipping goes mainstream there is a sort of mania permeating in the air. Because after all, what are we really doing here? Adding bells and whistles to a home. This isn’t a new industry adding millions of new jobs or revolutionizing the way we live like the internet. In the end, there will be an end buyer and it is likely to be a family going deep into mortgage debt to purchase a former crap shack with plastic surgery.

Flipping is hot in SoCal. A reader sent over this flip in Del Rey. Let us take a look at it:

12716 Admiral Ave, Los Angeles, CA 90066

5 beds, 5 baths, 2,600 square feet

They went all out on this flip. These are professionals here and went out of their way to make this thing glimmer. You always sell the future and try to erase the past. Have you tried to watch 1950s or 1960s movies? They don’t exactly hold up well. Let us look at the sales history here:

You can see the heat in 2013. It first sold for $575,000 in April of 2013 and then for $872,500 in July of 2013 only a few short months later. It was then listed for $1,695,000 in May of this year. So far, no takers. I love that Google Maps archives street views since it gives you a brief snapshot into the past. Let us look at this place before it was redone:

A nice little crap shack right. Not bad and in a prime location. So this was a complete tear down and rebuilt. It’ll be interesting to see what this place sells for eventually. Yet this kind of action is rather common in top notch locations in California.

Flipper mania is back in the mainstream! Next we’ll have “Flipper Tots” and “Flippers in Tiaras” or “Flipping Baby Boomers” but that would simply be stating the obvious. Flipping ain’t easy but someone has got to do it.

FSBO Millionaires Use Real Estate Agents

We at KCM pride ourselves on the quality of real estate information we deliver each and every day. We try to gather empirical evidence to validate the positions we take. We do not use just an anecdotal story to make a point. We also do not get caught up in the sensationalism of the moment. However, today will be different.

Do as I Say… not as I Do

This adage could be no truer today after it has been reported, in a recent Herald Tribunearticle, that when it came to selling his Florida mansion, Al Bennati, the longtime chief executive of BuyOwner.com, has chosen to list his home with a local real estate agent.

BuyOwner.com is one of many websites out there now that encourage home owners that they do not need to enlist the help of a professional agent to be able to sell their home. They go as far as to tell homeowners:

“BuyOwner.com allows you to reach the most potential buyers in the shortest amount of time, in the most effective (the Internet) and most cost effective manner (no commission!) possible.”

Let’s break down that statement:

Myth #1 – The internet is the most effective way to sell your home

Many have said that, with the introduction of home search on the internet, hiring an agent is no longer a necessity. When the time came to list his own home, Bennati went against his own advice saying:

“To sell a home of this magnitude, it needs to be done by a person and a company that reaches buyers of this caliber.”

Myth #2 – FSBO’ing is the most cost effective solution

Without proper exposure to the “right kind of buyers” your home will not sell. Many real estate professionals have elaborate strategies to get your listing in front of exactly who needs to see it.

The most recent Home Sellers’ and Buyers’ Profile Report from the National Association of Realtors revealed that, though 92% of buyers search for a home on the internet, 90% still use a real estate professional.

This isn’t the first time that a CEO of a major FSBO website has enlisted the help of an agent when the time came to sell their own home. In August of 2011 we reported on Colby Sambrotto of forsalebyowner.com who, after failing to sell his home using FSBO websites, needed an agent to sell his NYC apartment.

And, he got more money!!!!

Bottom Line

Two separate people made fortunes convincing others to sell their home through their FSBO sites. Yet, when it came to selling their own home, they recognized the value of using a real estate professional.

There is a reason the real estate industry has been around for centuries: it performs a valuable service.

New home sales had a horrible reading in the latest set of data. Hard to blame the polar vortex on this one since the only area in the country that saw a jump in sales was in the frigid Northeast but what of the other areas? Of course what the press fails to recognize is that Americans for the most part are too broke to afford homes at current investor inflated prices. Since more than 30 percent of all sales since 2008 were going to the investor class, this group pulling back is showing how solvent most households truly are. Some people assume that millions of holed up Millennials will emerge from their parent’s basement only to flood the market with an unrelenting appetite to purchase homes. First, many of these young adults don’t even have the incomes to cover rents in more expensive zip codes forget about purchasing a home. So it is no surprise that new home sales fully collapsed last month. The West had the second biggest monthly decline and we are flat out in a drought! Definitely can’t blame the weather here. What you can blame is affordability and with investors slowly pulling back, we will now find out the ability of the housing market to stand on its own two feet with more traditional buyers.

New home sales hit a wall

New home sales plunged dramatically on the latest sales report. It should be obvious that affordability is a big problem even with juiced up interest rates that have turned on those house horny investors. Yet even hormones can’t justify prices in many markets and we are seeing a pullback. It is becoming harder and harder to justify current prices in many markets. Sure, people are still paying high prices but the lemmings are slowly waking up and inventory is growing. Builders need to think long-term and they are certainly not taking a big dive after this report.

First, take a look at how deep the dive was in new home sales:

So much for the weather being an excuse. New home sales fell 14.5 percent nationwide. Prices are simply too high for many traditional buyers across the country. To put this into context you also have to see how pathetically low new home sales have been:

Where is the housing recovery? This chart is indicative of the massive demand investors have for lower priced foreclosures and distressed homes. You know, the graveyard of 7,000,000 foreclosures that all of a sudden people have forgotten? New homes are more expensive and tend to rely on traditional home buyers. As we have said, with incomes going stagnant this is a big deal. You rarely find flippers or investors buying up new homes. The chart above highlights this trend and reflects the massive demand from investors for existing home sales. They have crowded out regular buyers since 2008 and are largely responsible for the big rise in prices last year.

Inventory creeping back up

Since investors are pulling back and many households are priced out of the market, inventory is slowly creeping back. We have now reached a 6 month of supply in the housing market (6 months tends to be the “normal” balance point between buyers and sellers but good luck trying to claim this market as normal):

The last time we had 6 months of supply was back in 2011. People are still house horny and would like to purchase a champagne house on a beer budget. I doubt people really run the numbers that carefully when making a big purchase. Most will take the max a bank will give them. Thankfully today, we actually have some due diligence in the market. Investors circumvent this process with their large pools of money but it is clear that many are starting to pullback.

The recovery was largely driven by artificially low interest rates (Fed members are seeing higher rates shortly), low inventory (creeping back up), and investors (demand is waning). These are the three big groups pushing prices up since the housing crash hit. People assume pent up demand is going to flood the market and fill the gap left by investors. Where is this demand? Millennials? Doesn’t seem like it since many are also in debt up to their eyeballs in student debt and their incomes are not so hot. Typically rising prices in housing would lead to a healthy response by builders to add more supply. Instead, many builders have been building multi-family rental housing. This is a new trend just like the sustained flood of big money in single family homes, or the Fed’s uncharted QE adventure, or the pricing out of the middle class from the bedrock of their wealth, housing. The collapse of new home sales and the rise in existing supply should be expected given the weak growth in household incomes.

Loan Shortage Pushes Mortgage Firms to Accept Lower Credit Scores

A growing number of home lenders are lowering their minimum credit scores in an attempt to boost origination volumes that have suffered as interest rates climb.

Until recently, most lenders refrained from lending to borrowers with credit scores far below 600, even when government loan programs like the Federal Housing Administration allowed it. The lenders feared having to repurchase the loans or indemnify the FHA for losses if the borrowers defaulted, not to mention the reputational risk associated with subprime lending in the wake of the housing crash.

But as lender operating costs have mounted, due in part to new regulations, and margins have shrunk along with volume, stretching underwriting guidelines has become more compelling.

“Banks that are going to make money lending in the mortgage market are going to need to find other borrowers, so the natural progression is to move down the credit curve,” says James Frischling, the president and co-founder of NewOak Capital Markets LLC, an advisory firm in New York.

Lenders began relaxing credit score requirements late last year, after long-term rates began to rise in response to the Federal Reserve’s announcement that it would phase out its bond buying program.

The average minimum FICO score for the 15 lenders with the lowest minimums was 571 during the fourth quarter, down from 599 for those same lenders a year earlier, according to National Mortgage News‘ Quarterly Data Report.

Given the experience during the downturn, lowering credit score minimums has to be done carefully, says Ray Brousseau, an executive vice president at Carrington Mortgage. His Santa Ana, Calif., company will lower its minimum FICO score for government loans to 550, effective Monday.

“Not everyone is positioned to go down the credit spectrum and delve deeper…but if you’ve got a history of dealing with a client that is less than pristine” it can be done, says Brousseau, who says his company has this experience to manage the risk.

“You’ve got to have the resources to do it,” he says. “We wouldn’t do this if we weren’t retaining servicing.”

The word “subprime” originally was used to describe lower credit score borrowers. But during the subprime crisis it became associated with other loose underwriting practices, such as making loans without proper documentation, some of which performed abysmally despite high credit scores. Brousseau says Carrington’s lending will steer clear of such risks.

An estimated one in three consumers has a FICO score below 650, according to Carrington, which plans to specialize in this area.

While FICOs as low as 500 are allowed by FHA and were common in mortgage loans prior to the downturn, since then lenders have been wary of going much lower than 600. Lower FICOs can be dangerous for a company, not only because of indemnification risk but also because the FHA assesses lenders’ performance by looking at “compare ratios” in which their delinquency rates are judged against their peers’.

“I do believe that right now it’s more a function of ‘we’ve somewhat exhausted the refinancing game'” than a return to the abusively loose underwriting that led to the downturn, he says.

“I think of them as ‘non-investment-grade’ borrowers but clearly the word ‘subprime’ or ‘second chance’ or ‘alternative’ are being used. I don’t think it’s problematic because I do think banks in this space are going to be very diligent about proper documentation, due diligence and are going to hold to a standard that they are comfortable with.”

However, if too many lenders start making loosely-underwritten loans and start trying to outdo each other to compete, as they tend to do, underwriting could get stretched too far.

“It’s the next phase that makes me concerned,” Frischling says.

Most lenders remain reluctant to move down the credit curve, although financial pressure on them to do so is growing, says Anthony Hsieh, CEO of lender loanDepot. His Foothill Ranch, Calif., company has been able to manage costs through automated efficiencies.

Lowering credit score thresholds now could be premature – it’s hard to tell “whether you’re on the leading edge or the bleeding edge,” says Hsieh. He remains wary of such a move, but acknowledges it could help the industry serve the full spectrum of borrowers.

“Private sector and public officials all agree Americans do not have enough credit,” first-time homebuyers and minorities in particular, Hsieh says. But “it’s difficult for the industry because there’s still a lot of scar tissue” from the subprime debacle. The industry “does not want to get its head cut off” by regulators for extending its reach, he says.

As volumes have fallen, lenders have been exploring looser underwriting in areas other than credit, and there are different theories about which are more viable than others. But limited documentation appears the riskiest and least feasible, given post-downturn reform.

Lenders today generally want as much documentation as possible to protect them from liability under current regulation, including rules that hold lenders responsible for ensuring borrowers’ ability to repay. Also, secondary mortgage investors, skittish from huge losses on residential real estate finance assets during the downturn, have been demanding transparency.

The return of lower FICOs and potentially other relatively looser credit standards could test the effectiveness of reform measures designed to prevent lax underwriting from spiraling out of control as it did between 2005 and 2007.

One key difference this time around is that some of the loosening is occurring in FHA, Department of Veterans Affairs and other government-insured loans, which today dominate mortgage lending. By contrast, during the heady days of 2005-2007, the relaxation of guidelines occurred largely in the private market.

FHA and other government programs give borrowers a little more leeway when it comes to underwriting, in an effort to reach underserved populations such as first-time homebuyers, veterans or those in rural areas.

Some officials seem to be interested in seeing lenders serve more borrowers and expect there will be more lending further down the credit curve as the economy recovers.

Many pundits are warning that there will be a drop in real estate values because mortgage rates are beginning to increase. The logic makes sense. However, history shows that increasing rates have not negatively impacted home values in the past.

Four times over the last 30 years mortgage interest rates have dramatically increased. Here is the impact the increases had on home values at the time:

Perhaps the impact of increasing rates on future home prices won’t be as dramatic as some are predicting.

The Consumer Financial Protection Bureau’s new mortgage rules don’t take effect until the end of the week, but they’re already causing trouble, one mortgage industry head.

The CFPB on Monday released a “fact vs. fiction” guide regarding the new Qualified Mortgage rules. While the guide assured borrowers that the rules won’t hamper access to mortgages, National Association of Independent Housing Professionals President Marc Savitt has his doubts.

“All I can say is that we’re already starting to see some of the problems that will be arising, even though (QM) doesn’t go into effect until Friday,” he said Tuesday.

Savitt, a West Virginia mortgage broker, had particular scorn for the QM rule’s recommended debt-to-income ratio of 43%. Although in theory a loan can still meet QM standards with a DTI over 43%, in practice that can be difficult.

“The 43% maximum debt ratio is not a one size fits all,” Savitt said. “I had a case sent to me yesterday where the borrower had a 732 credit score. The borrower was putting down $79,000, which left a $50,000 loan. The borrower has been on her job for 20 years. Pretty good, right? The debt ratio was 47%. The loan was turned down by Fannie Mae as being too risky.

“The decision on this loan lacks common sense,” Savitt said. “We’re going to see more and more of this. It doesn’t mean borrowers can’t get a loan, but they’ll have to go into a non-QM loan, which will cost the borrower more money.”

Savitt doubted the QM rule in its present form would be workable in the long term.

“The way the CFPB perceives this rule to be is quite different from the way a lot of lenders perceive it,” he said. “…I think the CFPB in very short order will have to revisit these rules and make some changes to protect the consumer.”

Euphoria unlike housing inventory is in plenty supply when it comes to 2014 real estate forecasts. The glue holding the housing market comes from investors and generous banking policy. The one thing about economics unlike other hard sciences is that it happens in real-time. It also assumes certain rules are fixed but that really act more like clay to fit the whims of the power structure. It was interesting to see how few analysts at the end of 2012 predicted the massive run-up in real estate prices during 2013. What is typical of course is that analysts usually go with the momentum so it is no surprise that predictions for 2014 are rosier than they were for 2013 even though most are forecasting higher interest rates and most will acknowledge that this current pace is unsustainable. Yet higher rates will add pressure on income constrained households. Investors are already showing signs of pulling back in certain markets. Let us examine the 2014 real estate forecasting landscape.

Examining 2013 predictions first

Below you will find some predictions made late in 2012 in regards to 2013 housing:

Source: Calculated Risk

Most of the above forecasted price increases of 1.4 to 2.6 percent with the outlier being Barclays projecting a 4.6 percent gain in home prices for the year. Every one of these forecasts was dramatically off. Investor demand with tight supply created a dramatic rise in prices:

Prices were up over 12 percent for the year. That is a big difference. What is interesting is that home sale forecasts and starts were not that far off. New home sales look to be around the 460,000 range so most of the analysts nailed this. Housing starts ranged from the 900,000 to 1,000,000 annualized ranges so this also stayed within forecasts. Yet they were dramatically off on the price changes. For one, this is no open-market so it is hard to apply models on a market that is essentially driven by the Fed, investors, and artificially low inventory:

Supply while increasing early in the year retreated once again once rates spiked over the summer. Banks are fully metering properties out even though you have near record low levels of inventory and prices surging. Prices are surging precisely because of the slow leakage but this has caused a market fully dominated by investors. Some people act as if they missed the boat when they stood no chance against the investor crowd that relied on non-traditional financing. Remember the days of having to write a handcrafted letter begging the seller to give you a chance to buy?

What is interesting about the start of this year is we begin the year with a few givens:

-1. Prices surged dramatically last year (fastest rate since the last bubble)

-2. Rates begin the year at multi-decade highs and presumably will move higher thanks to the Fed tapering but also the success of the stock market / economic indicators

-3. Inventory is back to low levels

-4. High level of investors but a slow reversal in many markets

With that said, let us look at forecasts for 2014.

Forecasting 2014

While the forecasts for 2013 were relatively conservative especially when we consider the source, the 2014 forecasts are downright optimistic:

Source: Calculated Risk

The most conservative measure comes from Wells Fargo predicting a 2.7 percent increase in prices. Merrill Lynch has the most aggressive forecast at 6.3 percent. What we should learn from the 2013 forecast is that chances are, all of these will be off. The question is, will these be off on the upside or downside?

What is interesting is that many of these forecasts already price in higher interest rates throughout the year:

Fannie Mae is forecasting a 30-year fixed rate mortgage rate of close to 5 percent by year-end yet has a 5.9 percent price increase for the year. We already witnessed how quickly the market momentum stalled out over the summer once interest rates went up. This will impact cash strapped home buyers who live on a razor thin margin for the monthly payment. Fees were set to go up on traditional mortgages but of course, the government and banking apparatus stepped in like a deus ex machina to keep the party going.

The housing market of today is driven by speculation and momentum. 2011 through 2013 was hot. Yet the slowdown is now starting. Depending on investor sentiment, this can tilt the market either way. The assumption is that when prices turn, investors will work collaboratively like banks to meter their way out of the mess. Of course there is no unifying protection system that has the power to freeze mark-to-market or that has the Fed’s blessing in terms of hedge funds or big money investors. Some may think 2014 is a good year to take money off the table and get back into the stock market which returned close to 30 percent for 2013.

Keep in mind these are analysts and organizations that live and breathe real estate. So what is your forecast for housing in 2014?

The year ends on a similar note to how it began. Low inventory seems to be the name of the game once again. The market has definitely softened here in Southern California. The latest figures reflect a shift from the blistering hot first half of the year. Last month sales fell by 10 percent from last year and the median price is no longer rising. In fact, the median price of $385,000 for Southern California is the same today as it was in June, right before rates moved up strongly. There seems to be a universal consensus that home prices can only go up from this point forward based on low inventory. Typically starting in January we see a steady stream of new inventory come online for the spring and summer selling seasons. That is yet to be seen since the year ended with inventory retreating rather strongly. Yet with foreclosure resales making up a small portion of the market, there can no longer be the excuse that the median price is distorted because of foreclosure sales.

Foreclosure resales no longer a factor

Foreclosure resales are no longer an issue when it comes to price distortions:

Last month only 6.3 percent of all properties sold were foreclosure resales. Compare this to the nearly 60 percent figure back in early 2009. At this point, at least when it comes to foreclosures, there is very little foreclosures out on the market (after all, you can sell into this momentum as prices surged and the economy found its footing).

Yet there is also a pullback from cash buyers. For Southern California the peak of cash buyers was close to 36 percent reached earlier in the year but the latest figures show it at 27 percent. The gap is being made up by increasing jumbo buyers, FHA buyers, and those taking on adjustable rate mortgages.

Weak sales

Sales follow a very seasonal pattern. During the fall and winter sales typically fall. This is why year-over-year measures are good to track. So the 10 percent drop in year-over-year sales is significant especially with the very low amount of inventory in the market. Take a look at the seasonal sales pattern for SoCal going back to 2000:

From 2000 to 2007 we only went under 20,000 sales per month a couple of times regardless of the season. That is it. The latest sales figure? 17,283 in the midst of the median home price increasing a whopping 20 percent from last year.

As I mentioned earlier the median home price has stalled out from June:

The current SoCal median home price is $385,000. Keep in mind that much of the investors that were buying were buying with the notion that prices would only go up. So we enter a self-fulfilling prophecy phase; will investors continue to buy while prices don’t go up? Obviously the stalling out in appreciation has caused cash buyers to pull back. The figures highlight this and with a massive amount of buying coming from investors this will have some sort of impact.

California swings from euphoria to panic and this has been the case since the late 1990s with it accelerating in the early 2000s. The pace of stock market growth and also real estate appreciation seems unsustainable based on fundamentals. It is clear that on the price front, SoCal is starting to see some stalling out. From double-digit price gains to suddenly seeing the median price not move from June for the region. What is moving however is a drop in sales but also inventory. When you read media analysts they talk about “normal” seasonal patterns and if this is the case, we should see an increase in inventory starting in January. It is yet to be seen if this increase in inventory will be accompanied by more investor buying.

I’m not sure why some try to down play cash buyers because in California cash buying is now a big segment:

Contrary to the idea that cash buyers are buying up all prime properties many are looking for investments. This is why the median paid by cash buyers for last month was $342,750 (or 12 percent less than the overall median price for SoCal). The good news for would-be buyers is the nuttiness of the market for the last couple of years is starting to ebb. At current prices and with current interest rates it makes no sense for investors to buy in most of SoCal. If this group continues to pullback, it will be interesting to see if the market can stand on its own two legs given weak household income growth and higher interest rates. I think we are going to find out shortly.

Prospective homebuyers may be in for a nasty shock if the mortgage market ever returns to its pre-crisis rates. After a few years of super-low rates, a vast majority of homebuyers think sub-5% mortgage interest rates are normal, according to data released Monday.

In a recent survey, internet real estate brokerage Redfin asked prospective homebuyers what they considered a “normal” interest rate for a 30-year fixed-rate mortgage. A combined 83% of respondents expected a normal rate to fall under 5%.

To put that in perspective, interest rates have averaged around 6.7% since 1990. Prior to March of 2009, they had never fallen below 5%, according to Redfin. In the 1980s, rates bounced anywhere from the giddy heights of about 18% to around 10%, according to data from the Federal Reserve Bank of St. Louis – but they never even got within shouting distance of 5%.

“Clearly, the Fed’s easy-money policies since the housing crash have trained buyers to expect mortgage rates that start with threes and fours,” wrote Redfin’s Ellen Haberle in the report. Homebuyers are also exhibiting “a high degree of intolerance toward mortgage rate fluctuations,” Haberle reported; more than 40% of survey respondents said they wouldn’t buy a home if rates rose much further.

That’s bad news for a Fed looking to taper its $85bn-per-month bond-buying program while keeping economic recovery rolling. When the Fed tapers, rates will rise, likely stalling mortgage lending. Just talk of a possible September taper caused rates to spike by more than a full percentage point over the summer, strangling the refi boom and prompting big lenders to lay off thousands of mortgage employees. Meanwhile, the number of new homes sold in the US dropped 13.4% between June and July, according to Redfin.